MONTPELIER — Vermont merchants doing business along the New Hampshire border say a proposed tax increase on gasoline will destroy what’s left of their fragile retail economy.

The Shumlin administration is looking to make up a $36 million shortfall in the fiscal year 2014 transportation budget by imposing a new surcharge on unleaded gas. But gas station owners from up and down the Connecticut River Valley told lawmakers Tuesday that they’re already losing business to their lower-tax competitors to the east. Adding a new tax now, they said, could put a nail in the coffin of a long-struggling retail sector.

“I will lose what business I have left,” Cheryl Cote, owner and operator of a gas station in Canaan, told members of the House Committee on Transportation. “This tax is destroying the businesses along the New Hampshire-Vermont border — totally destroying them.”

Chris Cole, director of policy and planning for the Agency of Transportation, said tax revenue isn’t keeping pace with Vermont’s infrastructure needs, in part because of flagging gasoline sales. Sales of unleaded gas in 2011 were about 9 percent off their peak in 2005.

The Shumlin proposal would assess a 4 percent tax on the retail price of gasoline and cut the current per-gallon excise to 14.3 cents, from 19 cents. Combined with a $9 million bond, the revenue package would net the $36 million that Cole said is needed for upkeep of roads and bridges. Without the money, he says, Vermont won’t be able to afford the state match for its federal projects and could be forced to send back an estimated $40 million to Washington, D.C.

But Peter Annis, owner of Black River Quick Stop in Springfield, said he’s already losing retail traffic to Granite State competitors in Claremont and Charlestown, where state gas taxes are 7 cents per gallon lower than they are here. The Shumlin proposal would, at current gas prices, add 8 or 9 cents per gallon to the state portion of the gas tax and open up a 15-cent gap across the border.

“As a border town owner who has seen the state increase the cigarette tax and a ... drop in cigarette sales, I can only imagine what will happen with this proposed increase in the gas tax,” Annis said.

Like most gas station owners, Annis said, he relies on the pumps to attract retail business. He said he’s already taking a loss on gasoline sales to keep foot traffic coming through the store, but said he won’t be able to eat another 9 cents per gallon.

Joe Choquette, a Statehouse lobbyist for the Vermont Petroleum Association, said the proposal would give Vermont the ninth-highest state gas tax in the nation; New York’s would still be far higher.

Cole said the Shumlin plan has the benefit of tying the gas tax to an inflationary index, something that will allow revenue to keep pace with rising construction costs. The existing gas tax, he said, has lost about 40 percent of its buying power over the last 20 years. And the plan has the support of numerous interest groups, including the Vermont League of Cities and Towns, which said municipal road budgets will be among the first oxen gored should the state fail to solve its budget shortfall.

Not everyone in Montpelier is so convinced of the need to raise the gas tax.

“I’m not there yet,” said Sen. Dick Mazza, a Grand Isle Democrat and chairman of the Senate Committee on Transportation. “I think there still may be wiggle room in the budget where we can come up with money we need for the federal match.”

Rep. Patrick Brennan, a Colchester Republican and chairman of the House Committee on Transportation, said there may be ways to raise the revenue without upping prices at the pump. Brennan said one-third of revenue from the purchase and use tax — about $29 million annually — is now deposited into the education fund.

“If we just kept that money in our transportation fund and maybe (tied the existing excise tax to inflation), we’d be where we need to be, revenue-wise,” Brennan said.

But House Speaker Shap Smith, who looks to be on board with Shumlin’s proposal, said he couldn’t support a plan that took nearly $30 million from the education fund without finding a way to replace it.

And Brian Searles, state Agency of Transportation secretary, said that while the purchase and use tax idea may be worthy of consideration, it’s too late in schools’ budgeting cycle to be messing around with the education fund.

Searles said he sympathizes with the retailers in border towns.

“They are a genuine concern, and we hear them,” he said.

But he said a proposal pending in the New Hampshire Statehouse may minimize the impact. Lawmakers there are mulling a 12-cent-per-gallon increase in the state gas tax, a response, Searles said, to years of underfunding in Granite State transportation budgets.

“I think it’s important to look at this in the context of what’s going on in other states,” Searles said. “Other states are having their own problems.”